AIA has already been extended to 31 December 2021. Enhanced super-deduction reliefs now available for certain investments.
Annual Investment Allowance
As previously announced last Autumn businesses, including manufacturing firms, can continue to claim up to £1m in same-year tax relief through the Annual Investment Allowance (AIA) for capital investments in plant and machinery assets until 1 January 2022. The extension of the temporary £1m cap was originally due to revert to £200,000 on 1 January 2021.
Super-deduction relief
From 1 April 2021 until 31 March 2023, companies investing in qualifying new plant and machinery assets will benefit from a 130% first-year capital allowance. This upfront super-deduction will allow companies to cut their tax bill by up to 25p for every £1 they invest, ensuring the UK capital allowances regime is amongst the world’s most competitive. Investing companies will also benefit from a 50% first-year allowance for qualifying special rate (including long life) assets.
For qualifying expenditures incurred from 1 April 2021 up to and including 31 March 2023, companies can claim in the period of investment:
- a super-deduction providing allowances of 130% on most new plant and machinery investments that ordinarily qualify for 18% main rate writing down allowances
- a first year allowance of 50% on most new plant and machinery investments that ordinarily qualify for 6% special rate writing down allowances.
Legislation will be introduced in Finance Bill 2021 to amend Part 2 CAA 2001 to bring in the super-deduction, an enhanced temporary 130% first-year allowance for main rate assets, and a 50% first-year allowance for special rate assets.
Certain expenditures will be excluded. The general exclusions at s46 will apply. In addition, there will be exclusions for used and second-hand assets and expenditures on contracts entered into prior to 3 March 2021 even if expenditures are incurred after 1 April 2021. Assets used wholly within a ring fence trade will be excluded from the super-deduction, as they already have a 100% allowance, with assets used partly in a ring fence trade temporarily qualifying for a 100% first-year allowance. Plant and machinery expenditure which is incurred under a Hire Purchase or similar contract must meet additional conditions to qualify for the super-deduction and special rate relief.
The rate of the super-deduction will require apportioning if an accounting period straddles 1 April 2023. The rate should be apportioned based on days falling prior to 1 April 2023 over the total days in the accounting period.
Amendments will be made to Chapter 5 to bring in new disposal rules that will apply to assets that have been claimed to these allowances. Disposal receipts should be treated as balancing charges (taxable profits), instead of being taken to pools. The calculation includes rules which treat only part of the disposal receipt as a balancing charge, if part of the original expenditure is claimed by these temporary allowances, or part is claimed by other capital allowances.
Further, for assets that have been claimed under the super-deduction, the disposal value for capital allowance purposes should take the disposal receipt and apply a factor of 1.3, except where disposals occur in accounting periods straddling 1 April 2023, resulting in a factor lower than 1.3. This rule does not apply to the 50% first-year allowance for special rate expenditures.
An anti-avoidance provision applies to counteract arrangements which are contrived, abnormal, or lacking a genuine commercial purpose and existing rules at Chapter 17 apply, including the exclusion of connected party transactions from first-year allowances.
Freeports
An enhanced 10% rate of Structures and Buildings Allowance for constructing or renovating non-residential structures and buildings within Freeport tax sites in Great Britain, once designated. This means firms’ investments will be fully relieved after 10 years compared with the standard 33 ¹/³ years at the 3% rate available nationwide. This will be made available for corporation tax and income tax purposes. To qualify, the structure or building must be brought into use on or before 30 September 2026.
An enhanced capital allowance of 100% for companies investing in plant and machinery for use in Freeport tax sites in Great Britain, once designated. This will apply to both main and special rate assets, allowing firms to reduce their taxable profits by the full cost of the qualifying investment in the year it is made, and will remain available until 30 September 2026.
Capital allowances for business vehicles
The government previously announced that it is consulting on bringing forward to 2035 the ending of sales of new petrol, diesel and hybrid cars and vans.
To encourage businesses to purchase more environmentally friendly (lower CO2 emission) vehicles, the availability of First Year Allowances (FYAs) has been extended to April 2025 (this was due to come to an end from April 2021).
100% FYAs will continue to apply for business cars acquired from April 2021 with CO2 emissions of 0g/km (pure electric vehicles).
Business cars with CO2 emissions up to 50g/km will be eligible for WDAs at the main rate of 18% while cars with CO2 emissions over 50g/km will be eligible for WDAs at the special rate of 6%.
The new 50g/km threshold will also apply for determining the lease rental restriction of 15% of the costs of hiring business cars.
This article has been shared from ACCA In Practice, to whom copyright belongs. Whitefield Tax are an ACCA Member Firm